Lexmark’s Q1 earnings announced on April 22 produced somewhat of a mixed market reaction. On a non-GAAP basis, revenues of $881 million exceeded Lexmark’s own guidance but represented a decline of about 1 percent compared with revenues of $886 in the year-ago quarter. Lexmark attributed the decline to its ongoing exit from the inkjet business and a decrease in hardware and supplies revenues. Net income of $58.3 million was down compared with $62 million in the year-ago quarter.

Revenues from the Imaging Solutions and Services (ISS) segment, which essentially includes everything except for Lexmark’s Perceptive Software business, declined 3 percent year over year to $817 million. Hardware revenue of $167 million decreased 8 percent compared with Q1 2013, while supplies revenues dipped 1 percent to $605 million.

Again, Lexmark’s exit from the inkjet business was a contributing factor in declining hardware and supplies sales. Revenue from the inkjet business was $73 million in Q1; down 40 percent from the year ago quarter and now representing about 8 percent of total company revenue. Going forward, Lexmark expects its “inkjet exit revenue” to continue to decline as a percentage of total revenue as supplies sales from the remaining installed base of inkjet printers naturally decreases over time.

While Lexmark’s exit from the inkjet business continues to be a drag on hardware and supplies revenue it is not the only negative factor. The firm saw an increase in laser hardware placements in Q1 but revenue from laser hardware actually declined 8 percent compared with the year-ago quarter. Laser supplies, on the other hand, is a radically different story. Laser supplies revenues were up 9 percent in Q1, which reflects the firm’s continued focus on higher-end products and market segments.

The bright spot in Lexmark’s Q1 results clearly came from the MPS and Perceptive Software businesses, which together the firm is now positioning as its “Higher Value Solutions Portfolio.” Combined, MPS and Perceptive Software reached revenues of $244 million, an increase of 18 percent compared with Q1 2013. MPS revenue grew 12% to $180 million, while revenues from Perceptive Software climbed 38 percent to $64 million.

Together, these businesses now account for 28 percent of Lexmark’s total revenue, up from 23 percent in the same period a year ago. More importantly, Lexmark is projecting revenues for its “Higher Value Solutions Portfolio” to grow by 15 percent and exceed $1 billion in 2014.

Our Take

Lexmark continues to make significant strides in the MPS space, announcing key wins on a regular basis and showing consistent revenue growth. Indeed, Lexmark is in a position of strength in the transition to services because of its IT reseller channel and its expertise in specific verticals. Lexmark’s channel has been vertically aligned for a long time, and the firm has worked hard to develop specific vertical solutions aimed at industries such as health care, pharmaceutical, government, financial, retail, and hospitality.

This has always been a point of differentiation for Lexmark and it is what has allowed them to maintain a consistent share position while competing against behemoths such as HP, Xerox, Ricoh, and others. While the majority of Lexmark’s MPS revenues come from direct engagements with large enterprise accounts, its vertically aligned channel will play a significant role in the firm’s ability to push its MPS value proposition to the SMB market.

The challenge for Lexmark, of course, is driving revenue and profits while its core printing business is under attack from competitive pressures and outside forces. As we all know, migrating from transactional to contractual sales does not necessarily grow the market. While Lexmark is succeeding at growing its MPS business and even increasing its revenue mix of “high value” solutions, this is not necessarily driving top-line revenue growth.

While Lexmark talks a lot about transitioning to a software and solutions company, it has always positioned its value-add software as a key enabler for driving its core business: growing the hardware installed base and capturing more pages—a strategy that is shared by many of its competitors. But on the surface it would appear that Lexmark has even greater opportunity to enhance and enlarge its software business to lessen its dependence on print.

Sales of Perceptive Software Solutions have more than doubled since 2011, and Lexmark is targeting revenues of approximately $500 million by 2016. The firm has articulated a compelling strategy aimed at attacking the challenge of unstructured information (both paper- and digital-based) in the office environment. Lexmark has developed a core set of software applications and services that address both content and process management, built on a strong set of industry-specific solutions designed specifically for a broad spectrum of vertical markets. Leveraging these solutions to further enhance its position in the MPS market while growing non-print-related revenues could bode well for Lexmark in the long run.

Robert Palmer is chief analyst and a managing partner for BPO Media, which publishes The Imaging Channel and Workflow magazines. He is an independent market analyst and industry consultant with more than 25 years experience in the printing industry covering technology and business sectors for prominent market research firms such as Lyra Research and InfoTrends. In December 2012 he formed Palmer Consulting as an independent consultancy focused on transformation, mobility, MPS, and the entire imaging market. Palmer is a popular speaker and presents regularly at industry conferences and trade events in the U.S., Europe, and Japan. He is also active in a variety of imaging industry forums and currently serves on the board of directors for the Managed Print Services Association (MPSA). Contact him at robert@bpomedia.com.